Portfolio construction

Can investors count on stock-bond diversification?

October 10, 2021

Kevin DiCiurcio's headshot

Head of the Vanguard Capital Markets Model® research team

Are stocks and bonds moving in tandem?

Wu, Boyu (Daniel), Ph.D., Beatrice Yeo, CFA, Kevin J. DiCiurcio, CFA, and Qian Wang, Ph.D., 2021. The Stock-Bond Correlation: Increasing Amid Inflation, but Not a Regime Change. Valley Forge, Pa.: The Vanguard Group, Inc.

Why long-term investors maintain a balanced portfolio

Correlations in context: Time matters

Short-term trends can vary; long-term positive or negative correlations can last decades
Chart shows short-term fluctuations in stock/bond correlations, including spikes into positive correlations, but also shows a steady long-term negative correlation since 2000.

How much inflation would it take?

Positive correlations require high inflation
Chart projects 24-month rolling stock/bond correlations for different scenarios of average ten-year trailing inflation from 2021 to 2031. According  to our research, 2% average ten-year trailing inflation would result in a 24-month rolling correlation of negative 0.27; 2.5% average ten-year trailing inflation would result in a negative 0.14 correlation; 3% average ten-year trailing inflation would result in a 0.25 correlation; and 3.5% average ten-year trailing inflation would result in a 0.36 correlation.

Asset allocation, more than correlation, influences portfolio outcomes

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